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October 23, 2023

UK government seeks industry views on ISSB Scope 3 standards

Thermal power station emissions
ISS claims that less than 30% of companies globally report ‘meaningful disaggregated data’ for Scope 3 emissions (Photo: Daria_Nipot/Envato)

The government has issued a call for evidence on Scope 3 emissions reporting as it weighs up whether to endorse the International Sustainability Standards Board’s disclosure standards

The UK government is asking businesses and investors for their views on the costs, benefits and practical implications of reporting Scope 3 greenhouse gas emissions, as it considers whether to endorse the ISSB’s disclosure standards in the UK. The ISSB’s IFRS S1 and IFRS S2 standards set out expectations for the reporting of Scope 1, Scope 2 and Scope 3 emissions. 

Earlier this year, it pledged in its Green Finance Strategy to issue a call for evidence on Scope 3 emissions reporting, which will run until December 14.

The government is also seeking views on its existing Streamlined Energy and Carbon Reporting framework, under which most Scope 3 disclosures in the UK are currently voluntary.

This represents the latest push by policymakers to encourage the disclosure of Scope 3 emissions. Less than 30 per cent of companies globally report “meaningful disaggregated data” for Scope 3 GHG emissions, according to advisory firm ISS Corporate Solutions.

The EU has introduced Scope 3 reporting rules under its Corporate Sustainability Reporting Directive. Large companies and most listed businesses can choose to report their Scope 3 emissions, while those that only partially disclose this data must explain why they have withheld other information.

Stricter policies, meanwhile, are being pursued in the US — particularly in California, which has recently passed mandatory Scope 3 disclosure rules for all large businesses. While the regulations faced stern opposition from lobbyists, they also received support from the likes of Apple and Google.

The scope of California’s rules goes beyond those tabled by the US Securities and Exchange Commission, which has limited its disclosure proposals to listed companies. Businesses are racing to keep up with the proliferation of climate-related disclosure rules.

In its call for evidence, the government recognised “issues surrounding data availability and the impact of Scope 3 reporting on smaller businesses within a supply chain”. It is, however, focusing on the SECR and the ISSB’s standards.

The government is assessing whether to set requirements on Scope 3 reporting within a UK-endorsed version of IFRS S2, which covers climate-related physical and transition risks, as well as “climate-related opportunities”.

It said the Financial Conduct Authority will consult on change rules for listed companies to refer to UK-endorsed standards in early 2024, with the potential for new rules to be introduced for listed companies for accounting periods beginning in 2025.

“The financial system is stretched addressing sustainability-related disclosures, and we appeal for greater time to ensure all parts of the financial system are aligned simultaneously,” said Monique Mathys-Graaff, head of sustainability solutions at consultancy WTW.

Mathys-Graaff recognised the importance of Scope 3 to understanding a portfolio’s impact. “However, there are challenges with implementation timelines given the enormity of all the regulatory requirements,” she told Sustainable Views. 

“For most UK entities, they will have to consider not only these regulations, but also the regulatory environments in Europe, the US and other geographies,” she added. “While the ISSB endorsement is a great first step, it needs to be one taken within realistic timeframes and with appropriate policy reforms to support it.”

Annika Brouwer, sustainability specialist at asset manager Ninety One, told Sustainable Views that “carbon disclosure should be corporate standard practice no matter the size of the company”. She said: “In terms of prioritisation, larger companies with bigger impact and more complex value chains – who often have the budgets to do so – should lead the way on disclosure, with smaller companies and SMEs [having] more leeway on the intensity and urgency for their reporting.”

The British government is also seeking views on the SECR with an eye on making reforms to reduce compliance costs. Introduced in 2019, the framework compels some large organisations to publish their Scope 1 and 2 emissions in their annual reports, with the aim of increasing companies’ awareness of energy costs and emissions.

The call for evidence asks respondents to explain the benefits of the SECR and the potential costs of Scope 3 reporting, as well as their expectations for the biggest barriers surrounding producing consistent Scope 3 data. It also asks investors for their views on the benefits of Scope 3 reporting outside the investment community.

Other countries across the world are preparing to implement the ISSB standards. In October, Brazil set a timeline for the adoption of IFRS 1 and 2. Elsewhere, Nigeria and Kenya have announced their intentions to introduce these standards.

A service from the Financial Times